With several automakers recently announcing price increases to offset input costs, steel prices have been put in the spotlight.
Steelmakers have in turn been hit by soaring global prices for iron ore, the main raw material, as demand from China has exploded. And with India’s iron ore production dropping in recent months, steel producers have been caught in a bind.
“China’s targeted fiscal stimulus for the construction sector has led to a sustained and sharp rise in demand for steel there,” said Arnab Hazra, deputy secretary general of the Indian Steel Association (ISA) . “The demand for steel in China is expected to exceed one billion [tonnes] mark for the first time [in 2020]. “
As a result, Chinese demand for iron ore has also increased. “India exported significantly more iron ore in the nine months ended December, compared to any previous fiscal year,” Hazra added.
Trade intelligence firm SteelMint said on Friday that India’s iron ore exports doubled to 40.7 million tonnes (mt) in 2020, from 19.1 tonnes the year before. Of this total, China alone accounted for 38.1 tonnes compared to 16.6 tonnes it imported from India in 2019. Iron ore exports are attractive to Indian miners as world prices are now about about $ 170 per ton. “Previously, iron ore touching $ 100 was news. $ 165-170 is a one-time price, ”said a steel industry official, requesting anonymity.
Australia is a major trading partner for China, but the bilateral relationship has faced difficult weather conditions after the first called for an investigation into the origins of the COVID-19 pandemic. While Australian wines and coking coal have faced higher tariffs and customs delays, iron ore has so far been spared, as 60% of China’s needs traditionally come from China. island nation.
After record exports of iron ore in October, Australia saw its figures drop 2.2% month over month in November, apparently due to the hurricane season when Australian port activity took off. tend to be affected.
“The dynamics of the global supply chain are being redefined by geopolitics,” Srivats Ram said. MD, Wheels India, which has seen a 20% increase in steel costs over the past 12 months. “[This] affected the elasticity of the response, particularly at a time when there was a sharp contraction followed by a rapid increase in demand, with the availability of containers and increasing trade congestion issues. Sudden changes in demand occurring at the same time have caused disruptions in the balance of supply and demand on a global scale, ”he added.
The other factor influencing the supply and prices of iron ore in India is a drop in production, especially at the Odisha mines.
The ISA wrote to the Prime Minister’s Office (PMO) last month, pointing to a decline in domestic iron ore production as a key factor that left its members with no choice but to raise prices. steel. The production of iron ore fell by 30% compared to the period of the previous year to 92.1 tons in April-October 2020, he said. The ISA also called for a temporary ban on iron ore exports and cited the iron ore shortage and frequent increases in domestic iron ore prices by the public NMDC as having a particular impact on small producers of iron ore. steel – which accounts for about 40% of India’s 140-ton steel capacity.
In a separate letter to PMO, the Federation of Indian Mining Industries (FIMI) argued that the ISA was “obscuring the issue” and defended the actions of the iron ore sector. Local steel prices increased ‘unprecedented’ six times in November and December, FIMI said, saying there was no need for the steel industry to raise local prices in line with rates international. He also said the country earns foreign exchange through iron ore exports.
FIMI also said that of the 33.4 tonnes of iron ore exported between April and October, 22 tonnes were of a quality that the local steel industry did not need as a raw material. He also pointed out that some steelmakers had obtained iron ore mining leases but their production was well below targets.
In February-March 2020, 19 Odisha mines whose leases had expired were auctioned. As soon as the auction ended, lockdowns for COVID-19 erupted. It takes time for a new leaseholder to start and ramp up production. In addition, the former tenants had time to remove the remaining stocks from the mines. “Add to all of this the disruption that a rainy season and poor logistics cause, iron ore production has naturally been hampered,” ISA’s Hazra said. Only 4 to 6 auctioned mines had started active production, he added.
A senior executive of a major steelmaker, requesting anonymity, responded to FIMI’s claim, saying: “While using the allotted time of six months to clear their inventory, the former tenants of Odisha mines have ended up blocking the ports, sidings, road networks and rail lines of iron ore they had reserved for export. They didn’t have to pay a premium to the government over the huge premiums the new tenant has to pay. Thus, the first tenants were willing to pay a much higher cost for the logistics to clear inventory within the legal limit. Even though the new tenants wanted to move their production from Odisha for home use during the period, they could not do so due to the blockage of logistics by previous tenants.
Highlighting China’s role in absorbing global steel supplies, he said, “China’s steel consumption in 2020 was 72 tons higher to 980 tons compared to the previous year. Its own production was only 58 mt above 1,054 mt during the period. He had to import steel and iron ore. “
The head of the steelmaker stressed that small steel players had not yet recovered from lockdowns linked to COVID-19, either due to serious losses, low availability of working capital or a lack of local availability. of iron ore. This had led to a shortage of structural steel, which is mainly manufactured by secondary steel players.
By mid-December, prices for long products had risen 15 percent from June, Motilal Oswal Securities observed in a recent report. And rating agency ICRA noted last week that real estate developers could experience a 5-6% impact on margins given rising steel prices.
Regarding the impact of steel prices on automakers, the senior official said that, generally, the steel industry negotiates prices with automotive customers once every 6 months. But due to the impact of COVID-19, prices remained unchanged for automakers between October 1, 2019 and the end of September 2020, he noted. It was only for the six months starting October 1, 2020, that the prices of supplies to car makers increased, based on the average of the previous six months, which is around ₹ 5,500 per tonne, he said.
The steel industry official said he expects Chinese demand for steel to cool. “We expect that by the middle of 2021” the prices of iron ore and steel will drop, the official added.